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Is the LA Real Estate Market Shifting?

6% interest rates
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At the beginning of this year, we were looking at an interest rates at around 3.25%. But now, after just four (4) months, we are looking at interest rates of 6.0% or higher (woah!). Prices in that same amount of time have increased more than 10%.

What does the interest rate increase mean to both buyers and sellers? First, there will be less competition. Currently, there is already 50% to 60% less traffic at open houses. Last February, we are used to seeing 100 groups a day come to our open houses but currently, there are only 20 to 30 groups a day. This means that some of the buyers are completely out of a market right now or are rushing to buy a house before the rates continue to rise even further. Instead of 20 offers on a home, now there are around two (2) to four (4).

To illustrate the effect of this high interest rate, let us go back to an example we have used before – a house with $1 million purchase price and 20% down payment, that means the loan amount is $800,000. An interest rate of 3.25% at the beginning of the year, will result to a monthly payment of $4,700 a month. Now if we used the current interest rate of 6.0%, the monthly payment would be $6,000. That is an increase of $1,300 a month! Buyers would have to qualify for that and afford that extra $1,300 a month.

The common expectation is that the market is going to soften. Buyers are telling themselves that it is not a good time to buy and will wait for the market to soften. Our clients keep asking us, “Will home prices keep going up?” Even if rates continue to climb, it doesn’t mean that the prices are going to collapse. There’s several factors involved and the biggest one is that there’s not enough homes for sale. This results in the continuing demand preventing home prices from dropping. We are still continuing to see showings on our listings.

Next question is, “Why the inventory is really low right now?” The answer to that is because the interest rates have risen so much, all owners that are in the 2-3.5% interest rates will never be selling their homes. Even if they have a larger family now, they need a bigger house, or they desire to be closer to work, they will not be selling their home because it does not make sense to sell the home with a low interest rate. Another scenario we are encountering quite often is that people who moved to outlying areas during the pandemic  now wish to return back to LA County because they were told to be in person at the office. It does not make sense for them to sell due to the higher interest rates. What they will do is rent out that house and they will buy or rent in the Valley. That is more inventory not coming in the market and increasing the buyer pool at the same time.

“The interest rate hikes are causing a shift in the real estate market. ”

What should we expect? According to Fannie Mae, the prices will go up 11.8% for the remainder of the year. That is in line with CoreLogic, Redfin and Zillow predictions for the remainder of 2022. Experts agree home prices will also increase about 5% in 2023.

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